Should You Be Scared of Anonymous Founders?

Crypto is no stranger to anonymous founders. Bitcoin'sSatoshi Nakamoto was effectively anonymous, and the received wisdom says that this enabled the original cryptocurrency to develop organically, without its evolution bowing to the disproportionate weight of a single authority figure.

However, whether it's October's Oyster exit scam, or the infamous BitConnect Ponzi scandal from earlier in the year, anonymous founders have been recently earning themselves a bad reputation, with anonymity seeming to function only as a way of enabling fraudsters to escape with loot.

But as Bitcoin proves, some cryptos with anonymous principals are legit, and there are signs of credibility investors can look for when confronted by a 'faceless' new coin.

No accountability

First made public in September 2017, the Oyster Protocol (PRL) was promoted as a way of monetizing data- and file-sharing on the internet.

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It garnered enough of a following to reach a market cap of nearly USD 230 million by the beginning of January, although it plunged by 98% by August, to a cap of less than USD 4 million.

It was, in other words, already in trouble, and the private decision of its anonymous founder – 'Bruno Block' – to tweak its smart contract in order to take PRL for himself only confirmed its demise.

And by perpetrating this exit scam, Mr 'Block' highlighted one of the main drawbacks of having an anonymous founder. Because his actual real-world identity wasn't associated with the Oyster project, he personally felt less pressure to work towards restoring it to its former glories and making it a success.

More seriously for investors, his anonymity also led him to the belief that he could exit without suffering repercussions, just as it did with BitConnect and LoopX.

Weaker governance

For example, given that 'Satoshi Nakamoto' hasn't been active in Bitcoin since late 2010, the cryptocurrency's community has occasionally suffered from problems when it comes to reaching consensual decisions, as seen with the whole scaling debate and Bitcoin Cash hard fork from 2017.

Matthew Green – a cryptography professor at Johns Hopkins University – told CNBC in 2017, "Very few major decisions that would surprise people or are controversial actually get made. That's both [a] strength of Bitcoin, because it's very static, and it's also a weakness, because it can't react and develop new features the way that other systems can."

Privacy

Anonymous founders, however, bring at least one benefit. That is, anonymity provides founders with the freedom to launch new cryptocurrencies without suffering negative repercussions, whether from repressive governments or employers who don't like the idea of an employee attracting the 'wrong' kind of publicity.

"An anonymous founding team offers no additional benefits for a decentralized currency," Daniel Schwartzkopff – the CEO of Invictus Capital, a crypto investments company – explains to Cryptonews.com. "A centralized cryptocurrency, however, may be the target of law enforcement if it violates any securities and exchange control laws and so an anonymous team might avoid having the currency shut down."

"The main reason why I didn't publicize that I worked for Google previously is because I didn't want to make it seem like Google endorsed Litecoin or Bitcoin in anyway," said Charlie Lee, the creator of Litecoin, in 2013.

And by protecting themselves from unwanted scrutiny, founders allow themselves to build up their fledgling coins, while retaining the option of later unveiling themselves when their projects gain traction and become 'serious' (as TAU Coin founder David Wu, or 'iMorpheus', did in September).

Precautions

Even if anonymous founders can sometimes be justifiable, would-be investors still need to exercise extreme caution when approaching new coins, particularly if participating in an initial coin offering (ICO).

"My advice to an investor coming across an interesting new crypto project with an anonymous founder would first be to ask the reason for the anonymity […] If after this you don't feel like this is something special and believable - move on!"

Daniel Schwartzkopff agrees, adding the point that if the blockchain is decentralized enough to run without the founder, it's likely to be a safer bet than one that requires the founder's benevolence.

"I would strongly recommend that they avoid interacting completely unless it is a true, decentralized currency with its own blockchain. If you are not very technically adept and are doubtful if it does, in fact, meet this requirement, rather err on the side of caution and avoid it."